Skip to main content

Table of Contents

  1. Topic pack - Macroeconomics - introduction
  2. 2.1 The level of overall economic activity (notes)
  3. 2.1 The level of overall economic activity (questions)
  4. Section 2.2 Aggregate demand and supply (notes)
  5. Section 2.2 Aggregate demand and supply (simulations and activities)
  6. 2.2 Aggregate Demand and Aggregate Supply (questions)
  7. 2.3 Macroeconomic objectives (notes)
  8. Low Unemployment
    1. Low Unemployment
    2. What the data says
    3. The meaning of unemployment
    4. Case study - regional variation
    5. Consequences of unemployment
    6. Case study - tougher for men
    7. Types and causes of unemployment
    8. Disequilibrium unemployment
    9. Equilibrium unemployment
    10. Policies to reduce unemployment
    11. Low and stable inflation
    12. Low and stable inflation (notes)
    13. The meaning and measurement of inflation
    14. A consumer price index
    15. Finding out more about consumer price index weights
    16. Problems with measuring inflation
    17. Inflation - videos
    18. Consequences of inflation
    19. Hyperinflation
    20. The consequences of deflation
    21. Types and causes of inflation: demand-pull inflation
    22. Types and causes of inflation: cost-push inflation
    23. Case Study - car prices in Trinidad
    24. Possible relationships between unemployment and inflation
    25. PlotIT - Phillips curve
    26. Phillips curve - long-run
    27. Natural rate of unemployment
    28. NAIRU
    29. Economic growth
    30. Economic growth (notes)
    31. Causes of economic growth
    32. Economic growth and the PPF (1)
    33. Economic growth and the PPF (2)
    34. Economic growth and the business cycle
    35. Economic growth and the aggregate supply curve
    36. Consequences of economic growth
    37. Equity in the distribution of income
    38. Equity in the distribution of income (notes)
    39. Indicators of income equity
    40. Poverty
    41. The poverty line: An Indicator of Relative poverty
    42. The causes of poverty
    43. The role of taxation in promoting equity
    44. The role of taxation in promoting equity (notes)
    45. Other methods of promoting equity
  9. 2.3 Macroeconomic objectives (questions)
  10. 2.4 Fiscal policy (notes)
  11. 2.4 Fiscal policy (questions)
  12. 2.5 Monetary policy (notes)
  13. 2.5 Monetary Policy (questions)
  14. Section 2.6 Supply-side policies (notes)
  15. 2.6 Supply-side policies (questions)
  16. Print View

Problems with measuring inflation

Syllabus: Explain that inflation figures may not accurately reflect changes in consumption patterns and the quality of the products purchased.

S:\triplea_resources\DP_topic_packs\economics\student_topic_packs\media_macroeconomics\images\3dperson_question.jpgThere are several problems when trying to measure inflation. These include:

  • Changes in the quality of the goods and services included in the index. As R and D and technology imporvements feed into the design and production of many goods, so their inherent quality increases, but this is not always reflected in price levels. So comparing goods over time is problematic - try comparing personal computers from 10 years ago with now.
  • Special offers, which are now a feature of 'high street shopping' do not feature in the index and so people may be buying some products for a significantly lower price than the index is showing.
  • We also change our expenditure (Consumption) patterns. Although the weighting patterns are reviewed annually modern marketing can result in quick changes in consumer tastes.
  • The index is based on a sample and these can always be less accurate than was hoped. This introduces sampling errors into the figures.
  • Weighting is based on 'average' spending patterns. Thus the more a person deviates from the average, the less meaningful will be the official inflation rate for them. For example, food and heating and lighting costs may account for a much larger proportion of the income of low income groups than high income groups, so any price inflation of these items will disproportionately affect the poor. For example, a published rate of inflation of 3% may mean an effective rate of inflation of 10% for the less well off.
Syllabus: Explain that economists measure a core/underlying rate of inflation to eliminate the effect of sudden swings in the prices of food and oil, for example.

Some goods have notoriously unstable prices (just look at what has happened to the price of oil - record highs and record lows at the moment), agricultural prices are also very unstable due to weather changes. Therefore, when comparing prices over time a core or underlying inflation rate is calculated which removes these flucuations - you do not need to know how this is calculated etc.

Syllabus: Explain that a producer price index measuring changes in the prices of factors of production may be useful in predicting future inflation.

Producer Price Index

A typical supply chain consists of producers selling in bulk to wholesalers who put a profit mark-up on goods and then resell to retailers in smaller amounts but  higher
mark-up price and retailers then sell to consumers with a further mark-up price and usually in single items.

One way to foretell future consumer price inflation is by looking at the change in prices charged by producers
(Often this is referred to as - Factory Gate prices). If these increase then it is a sign that consumer prices will also increase in the near future. To calculate what is happening to producer prices a Producer Price Index (PPI) is calculated.

Past Paper Essay Questions

Nov 2013

4. (a) Explain why measuring the rate of inflation using a consumer price index (CPI) may not be accurate. [10 marks]

    (b) Evaluate two government policies to reduce inflation. [15 marks]

Nov 2009

2. (a) Explain how the rate of inflation might be measured and the factors which might make accurate measurement         difficult. [10 marks]

    (b) Evaluate the extent to which an individual government can influence the rate of inflation in its economy.
    [15 marks]